Nationwide Injunction Issued Against the Corporate Transparency Act

Alert
By John Jo and Heyward Armstrong

On December 3, 2024, in Texas Top Cop Shop, Inc. et al. v. Garland, the United States District Court for the Eastern District of Texas (the “Court”) issued a nationwide preliminary injunction against the government’s enforcement of the Corporate Transparency Act (“CTA”) and its implementing regulations. Accordingly, at this time, reporting companies subject to the CTA are not required to comply with the CTA’s obligations, absent further legal proceedings that could affect this preliminary ruling.

As discussed in our five prior client alerts below, effective as of January 1, 2024, the CTA and the rules issued thereunder by the Financial Crimes Enforcement Network (“FinCEN”) required most U.S. entities and foreign entities registered to do business in the United States to file reports with FinCEN (“BOI reports”) disclosing information about the entity and its beneficial owners (“BOI”).

Although the CTA has faced a number of legal challenges, including being declared unconstitutional by the U.S. District Court for the Northern District of Alabama on March 1, 2024 (see our prior alert discussing this decision), none of these legal challenges previously blocked enforcement of the CTA on a nationwide basis. However, yesterday the Court did just that, by ruling that the CTA and FinCEN’s final rule implementing the CTA (the “Reporting Rule”) are likely unconstitutional. Specifically, the Court enjoined the CTA, enjoined the enforcement of the Reporting Rule, and stayed the Reporting Rule’s compliance deadline, explicitly stating that “reporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadline pending further order of the Court.” (A copy of the Court’s opinion can be found here.)

In deciding for the plaintiffs, the Court found that the CTA was not authorized under the Commerce Clause of the U.S. Constitution, ruling that “[u]pholding the CTA would require the Court to rubber-stamp what appears to be a substantial expansion of commerce power. This, the Court will not do.” The Court also ruled that the CTA was not authorized under the Constitution’s Necessary and Proper Clause, holding that “[t]here is simply no enumerated power the Government can identify that would justify the CTA . . . .” The Court therefore found that the plaintiffs had shown a substantial likelihood of success on the merits of their challenge to the CTA under the Tenth Amendment to the Constitution. The Court further ruled that a nationwide injunction was necessary because one of the plaintiffs, the National Federation of Independent Business (NFIB), had members across the country.

As a result of the Court’s decision, reporting companies are currently not required to comply with the CTA, including filing BOI reports. Although the Court specifically referenced the upcoming January 1, 2025, deadline for reporting companies that were formed prior to January 1, 2024, the Court’s decision also applies to stay the application of the filing deadlines for entities formed on or after January 1, 2024 (generally due within 90 days following formation during 2024 and 30 days following formation thereafter).

While we have not heard the last word regarding the constitutionality of the CTA, given the Court’s sweeping statements regarding the CTA’s violation of the Commerce Clause and the Necessary of Proper Clause, it seems likely that the Court will, if the case progresses, rule in favor of the plaintiffs and against the CTA. Accordingly, the government will likely be required to appeal the Court’s ruling to obtain relief and continue enforcing the CTA. Although it is unclear what actions the government will take, it could immediately appeal the Court’s decision if it so chooses. If the government appeals the decision, it could seek to have the decision stayed while the appeal is pending, meaning the Court’s order would not go into effect and the CTA reporting deadlines would remain in place.

As the Court only issued a preliminary injunction, and the case is subject to ongoing proceedings and possible appeals, companies should continue to monitor the status of the Texas Top Cop Shop litigation and other litigation involving the CTA. If the government ultimately prevails regarding the constitutionality of the CTA or the scope of the injunction, reporting companies may again be required to file BOI reports and should be prepared to do so expeditiously. Accordingly, reporting companies should proceed carefully and likely will want to be prepared to make BOI filings by December 31, 2024 (or earlier, if required for companies formed in 2024) if the preliminary injunction is stayed or otherwise overturned on appeal. Reporting companies, especially companies with complicated capital structures or that will need to coordinate with third parties to complete their BOI reports, should strongly consider proceeding with preparatory activities for filing.

Smith Anderson will continue to monitor developments in this area and will provide updates as they become available. As always, if you have any questions regarding the CTA, please do not hesitate to contact a member of the Corporate & Transactional group or your regular Smith Anderson lawyer.

Prior CTA Client Alerts:

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